20VC: Founders Fund's Trae Stephens on Why The Most Competitive Deals are the Worst, Why No Company is Successful Because of their VC, Why We are Making ZIRP Mistakes Again Today, Why Loss Ratio is BS and Upside Maximisation is Everything

Trae Stephens is a Partner at Founders Fund, one of the world's leading funds where he has worked with some of the best and backed the likes of Palmer Luckey with Oculus and Ryan Peterson @ Flexport since the very early days. Trae is also Co-founder and Executive Chairman of Anduril Industries, a defense technology company focused on autonomous systems, and Co-founder of Sol, a next-generation wearable e-reader. Previously, Trae was an early employee at Palantir Technologies, where he was also an integral part of the product team, leading the design and strategy for new product offerings. In Today's Episode with Trae Stephens We Discuss: 1. From Hustling into Georgetown to Peter Thiel Ushering You into VC: What is Trae's story of how he got into Georgetown University, despite being rejected the first time? How did Trae make his way into the world of VC? How did Peter Thiel recruit him to Founders Fund? What advice did Brian Singerman give Trae in his first week in VC? Why is it so important? 2. How the Best Venture Firm in the World Invests: Decision-Making Process: Why do Founders Fund not have partner meetings? What is the investment decision-making process? Why does more process lead to mediocre outcomes? Competitive Deals: Why does Trae believe the most competitive deals are always the worst? What do Founders Fund do to specifically avoid the "herd mentality"? Upside Maximisation: Why does no one at Founders Fund care about "downside protection"? How do the team approach scenario planning and upside maximisation? 3. Do VCs Really Add Value: Why does Trae think putting VCs on a board for "value add" is total BS? Are there any cases in which Trae believes the VC can really move the needle for a company? Why does Trae believe venture would be better if it were just operator investors? Why does Trae believe platform approaches to VC value add is BS? 4. The Future of VC: Who and How to Win: How did being an operator at the same time as investing, make Trae a better investor? Why does Trae believe that vertical investing is BS and generalised is better? How does Trae favour; market, product and people? Will Trae back a founder when he hates the idea? What have been Trae's biggest lessons from his biggest hits and biggest misses in 10 years?

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Speaker 00

  We don't have Monday partner meetings. Everything is super difficult to get through the investment team, and this is on purpose. The more process you have, the easier that it is to game the process to get to some mediocre outcome. The worst deals are the most competitive deals. They're the ones that are super consensus. It's very easy in retrospect to say, wow, we really let that get out of hand. But we're doing the same stupid stuff all over again. For large funds, the economics only really work if you have a 10-plus billion-dollar winner in every fund.

• 0:33Harry Stebbings?

  This is 20VC with me, Harry Stebbings. Now today, we have one of the most incredible, but I think modest and under the radar people in startups on the show. He's one of the best early-stage investors in the business as a partner at Founders Fund, where he's led deals in incredible businesses like Flexport and Oculus, to name a few. And if that wasn't enough, he's also the co-founder of one of the fastest-growing companies in technology, Android, most recently valued at $8.5 billion. Android is a defense technology company focused on autonomous systems. But before we dive into the show today, we're all trying to grow our businesses here. So let's be real for a second. We all know that your website shouldn't be this static asset. It should be a dynamic part of your strategy that really drives conversions. That's marketing 101. But here's a number for you.

• 1:18Harry Stebbings?

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• 2:00Harry Stebbings?

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• 2:51Harry Stebbings?

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• 3:34Harry Stebbings?

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• 3:38Speaker 03

  You have now arrived at your destination.

• 3:40Harry Stebbings?

  Trey, I am so excited for this. So you've helped me with countless schedules for the show. I've wanted to make this one happen for a long time. So thank you so much for joining me today, Trey.

• 3:50Speaker 00

  It's a pleasure to be here.

• 3:51Harry Stebbings?

  Now, I would love to start with a bit of a weird one, but I want to start childhood. And parents and teachers see a lot. How would your parents and teachers have described the young Trey?

• 4:02Speaker 00

  Oh man, uh, yeah, I mean, I grew up in the country. Like I lived in the woods in a log cabin that my dad literally built with his bare hands. And I was kind of always this misfit, I would say. I love where I came from. I love Ohio. It's a wonderful place to be from. You know, there was always this Like tension that was like pulling me to escape. And I have an older brother, he's 18 months older than me. And my mom used to say that she had one son that's 18 going on 12, being my older brother. And I was like 16 going on 40. I had this kind of old soul from the very beginning. And I was the British version of an American teenager. Was like a 60 year old in a 16 year old skin. I just loved hanging out with adults.

• 4:47Speaker 00

  I loved sitting around and reading books. I loved like thinking about philosophy. I would not say that I was like a super cool teenager.

• 4:54Harry Stebbings?

  I mean, that has to be my favorite like phrase to enter, which is the American teenager in a British body. I do have to ask, I heard that your entry to Georgetown in particular is a rather unique story of persistence. So how did you get into Georgetown, Trey?

• 5:11Speaker 00

  I had great grades, great test scores. Like for all intents and purposes, it seemed like I was going to be able to kind of write my story for what I was going to do. But the problem was is I went to a rural public school in the middle of the country. We don't really talk about this very much as a country, we're focused on other social demographic problems. But it turns out that like you just, it's basically impossible to get into good schools. If your guidance counselor doesn't know all of the admissions officers at the Ivy League schools or whatever. And so I sent out a bunch of applications, I think I applied to nine schools and I got a lot of skinny envelopes back. I remember on the day that I got the skinny envelope back from five of the nine schools that I applied to.

• 5:51Speaker 00

  I went over to my high school girlfriend's house and I was like, well, you know, at least the school that I got, I did get into is next to where you're going to go to school. And she was like, yeah, about that and broke up with me. The same day that I had gotten rejected to all these schools. So I like went home and just laid on the couch with my face down. And my mom came over and she's like, what do you want to do? Where do you actually really want to go? And I said, I want to go to the school foreign service at Georgetown. And she said, Well, then you're gonna go to the School of Foreign Service Georgetown and she put me on a flight and sent me to Washington DC and said, "Go convince the admissions office in person that they should let you in." And so I sat on the doorstep of the admissions office demanding to see the dean.

• 6:32Speaker 00

  And eventually the dean came out and he's like, "Who is this crazy person that's loitering on my doorstep?" And I had a backpack full of recommendation letters, admittedly from people that I know now. It's like, they're probably not even reading these recommendation letters. It's like, "My high school cross-country coach" and things like that. And uh,

• 6:50Harry Stebbings?

  I mean, it wasn't your ex-girlfriend, was it?

• 6:53Speaker 00

  No, she did not write a recommendation letter, for sure. But they basically just said like, "This is crazy that you flew out here with no plan other than to like, demand to speak to me, and we're gonna put you on the top of the waiting list. And as soon as we like, get the final decisions back from everyone about whether they're going to attend or not, you'll be the first person off the list." And so, to my surprise, a couple of weeks later, I got a call from Georgetown and they were like, "All right, you're in. That was a crazy stunt that you pulled." The funniest part about this whole story, though, is that the, in my first week at Georgetown, I got invited to the president's office to have a meeting. And I thought like, "Wow, the president of the university is crazy, like, he meets with every incoming freshman." And so I go and meet with him and he's like, "No, I don't meet with every incoming freshman. I just heard your story from the dean of admissions."

• 7:37Speaker 00

  And he was like, "I needed to meet you, obviously you came from like a middle-class, lower-middle-class background. What's the financial situation here, given your story?" And I said, "I'm taking a ton of debt." He said, "You know, I can't help you with financial aid, but I can give you a job in the president's office." And so I ended up working for the university president all four years that I was in college. It was kind of like a crazy, it went from a bad situation, like getting rejected, to a situation where I was really set up to have a completely transformational life experience in very, very short order.

• 8:09Harry Stebbings?

  You mentioned the transformational life experience there. Does it not also just scare you in the way that bluntly, if you hadn't got on the plane, hadn't sat in their office waiting, your life could have been very different?

• 8:20Speaker 00

  Oh, it certainly would have been. I think like, again, this is like something we don't really talk about as a society, but lower middle-class rural, primarily Caucasian communities have just been obliterated by globalization. You know, J.D. Vance talks about this in his book Hillbilly Elegy. You see these stats from the elite universities about how many valedictorians they reject. It's like kind of a symbol of pride. It's just this community that they're rejecting because they have no connections, they have no money, there's no legacy admissions, they get no demographic boost from accepting these people. So it's just like, I was a stat. I was like one of these people that's like, look, we get nothing from admitting this kid with good grades and test scores.

• 9:03Speaker 00

  Doesn't benefit us in any way. And so I was just that stat to all the places that I applied to college. This is a lot of what has led to populism, the rise of populism in America, is all of these people saying like, man, we are just like being completely ignored. You know, you see these communities of blue collar, industrial workers that have historically been Democrats, that have shifted over to being populist Republicans, and it's because they're just ignored. And I feel like I kind of figured out a way through that genuinely because of my mom's persistence. Yeah, I would have, I would have ended up going to, you know, a state school and probably working at Deloitte or something. You know, it's a pretty big shift.

• 9:42Harry Stebbings?

  And for anyone who works at Deloitte, that's a wonderful career which you should be very happy with.

• 9:47Speaker 00

  I'm not sure that it is. And I'm willing to, I'm willing to go out on a limb and say that spending your life working for a consultant firm is probably not the path to having the most enlightened experience.

• 9:58Harry Stebbings?

  If enlightened experience is what you're going for, I agree with you. What would you do to change that? This is why I love the show because it's just too interesting. That's a problem in terms of that neglected population that we don't talk about either because it's not a minority of popular terms. What would you do to change that then as an entrepreneur, as a problem solver?

• 10:16Speaker 00

  These things are cultural problems more than anything else. My partner here at Founders Fund, Peter Thiel, who I also worked for when I was at Palantir, he's been talking about this for decades, like probably longer than anyone else. He started a program called the Thiel Fellowship to convince kids to drop out of college based on this idea that the elite universities are distorting our culture and our values. I think that there's some distortion that's happened that requires correction. That correction is, we've seen this on display actively over the last six months with some of these presidents being fired for kind of feeding into this hysteria in the in the cultural moment. We need to get back to a point where we have some way to generate meritocratic

• 10:57Speaker 00

  outcomes that are good for everyone, not just for like subsets of the population.

• 11:02Harry Stebbings?

  You mentioned Peter there. I do want to, before we move into the investing world, just discuss the entry. How did Peter convince you to leave Palantir, where you were doing very well, to then move into the investing side and join Founders Fund? What's that story?

• 11:16Speaker 00

  I'm not sure it was an opportunity as much as it was an order. It's kind of unclear. So I was, I was heading up what Palantir called the leveraged team, which is essentially the sales organization, and had been doing that for a while. In that role, I interacted with Peter pretty frequently because, you know, he would want to know like, what does our pipeline looks like? Where are we running into problems? Where can we leverage leadership to drive these opportunities to close? And so he and I became friends, really bonding around philosophy and theology primarily. And in March of 2013, which I had been at Palantir for about six years at that time, Peter just called me out of the blue and said, hey, we're raising this first billion dollar fund at Founders Fund. I would love for you to come join us at FF. You know, I kind of

• 12:00Speaker 00

  scratched my head. I'm like, Peter, I have no interest in finance. I don't know anything about venture capital. Also, I'm like, I literally work for you at Palantir. Like, what exactly is going on? And he's like, you know, like, you should entertain it. Like, I want you to meet other people on the team. And so I got together with a bunch of folks that are still at Founders Fund today, Lauren Gross, who's our COO, Brian Singerman, who you just had on your podcast a couple of weeks ago. They were like, okay, so why are we talking to you? I'm like, you know, Peter wanted me to talk to you. They're like, why are you interested in venture capital? I'm not actually interested in venture capital. What like deals that we've done are you most excited about? Like, I don't know what deals you've done, so I wouldn't even know what to be excited about.

• 12:43Speaker 00

  And not surprisingly, coming out of these very, very bad interviews, the process dragged for nine months. And then eventually I just get an email from Peter where he's like, all right, here's your offer. There's always this kind of like funny joke at Founder's Fund that like a horrible, horrible interview experience with me. And then that obviously meant that I ended up working at Founder's Fund.

• 13:03Harry Stebbings?

  Did you instantly like it? It's a weird job and it's very unstructured. Did you like it straight off or did it take time to assimilate?

• 13:11Speaker 00

  It took, it took time. You know, Brian Singerman gave me the best advice I got in my first month. When he said, the only thing that you should be doing for the next year is meeting with every single company you can. Have no standards, just like take meetings. And eventually you'll start perceiving what's good, what's not good. Like where you can kind of do a founder check to make sure that this is someone that the team would be able to get really excited about. And you can only do that with volume. There's no way that you could say, I'm going to be super discerning. I'm only going to take like top tier meetings. It's like, just do as many as you can. So my first year, I think I did like just over 500 pitch meetings, which for anyone that has done VC, I think you know that that is an absurd amount of pitch meetings in a year.

• 13:56Speaker 00

  And by the end of the year, I, I think I was like pretty well tuned to what it means to be a top tier founder, what it means to have like great alignment with a, with a business. And it does take about that long. It takes about 500 pitch meetings before you really know what you're doing.

• 14:13Harry Stebbings?

  Do you agree that it takes $20 million to learn to be an investor? I remember Jeff at Insight told me that. And I look back at some of my early deals and I'm like, oh God, I would not have done those again.

• 14:24Speaker 00

  20 million sounds low. I mean, if you only lose $20 million figuring out how to do this, then that's, that's pretty good.

• 14:31Harry Stebbings?

  If your receipt has 10 $2 million checks, it's still 10 fuckups, Trey.

• 14:36Speaker 00

  Totally. Yeah, no, I do think it takes a lot of that. And there's all sorts of things that I think the human brain is super interesting. Like, we have the ability to convince ourselves of all of these things that are just not true. Like, we look at something and we say, this category is way too competitive. The founder isn't like perfectly aligned. There's like this weird economic incentive structure. But this, ah, this is the exception to all of the heuristics I've learned in my time. And we do this stuff all the time. You know, it's a constant battle to like, remind yourself of all the reasons why these things don't work. Part of that is just maturity and getting to the point where you feel accountable, truly accountable for not allowing yourself to be sucked into these cognitive biases.

• 15:18Harry Stebbings?

  Do you know what is a trade type of deal? What is a straight down the fairway deal for you? For me, it's like a non-competitive industry. I never want to compete against fucking Sam Altman doing foundation models and Dario from Anthropic and Satya at Microsoft. I want like legacy architecture. I want like high pricing power. I want really, really large, old industries. That's a straight down the fairway deal for Harry, okay? Do you know what is a trade deal?

• 15:44Speaker 00

  Yeah, I really want a big category defining opportunity in industries that haven't been touched by modern technology in decades. And I want a founder that understands how to play inside baseball in that sector. Two great examples. You know, the first big check that I wrote at Founders Fund was Flexport. And no one was thinking about supply chain logistics in 2014. Ryan shows up and he's kind of this like kooky guy that lived in China and like made a bunch of money on like pricing arbitrage and bath fittings and four-wheelers, shipping them from China to the United States. And he was kind of this crazy outlier that it was like, he was either crazy or on drugs

• 16:28Speaker 00

  or going to be one of the greatest founders of all time. I think that like, as an industry, was super interesting to me. And then the second example of this is Xanderall, where basically, going to be super hard. It'll be really capital intensive. But if you could actually be a next generation rebooted version of Lockheed Martin or Northrop Grumman, that company could be worth hundreds of billions of dollars. And so I think that's the sort of stuff that I'm looking for.

• 16:52Harry Stebbings?

  I totally get that, but also it's not often a consensus deal. When you look at both of those deals, they're both anomalous in a lot of ways for traditional venture firm thinking. You guys push back on two really interesting notions in venture. A traditional notion of like weekly ICs and partnership decision making and the benefits of it. Listen, I speak to LPs the whole time. This, they love to hear, they love to hear that. You guys don't do that. How do you make decisions? And why do you encourage every investor to run their own book?

• 17:26Speaker 00

  This is absolutely true of Founder's Fund. We, we all run our own strategy. We don't have Monday partner meetings. Everything is super difficult to get through the investment team, and this is on purpose. The rough thesis is that the more process you have, the easier that it is to game the process to get to some mediocre outcome. And I'll give you an example. If like the most junior person on your team meets with the company and they're like, yeah, this company is pretty good. Like, I like the founder, I kind of like the idea. I'm going to have them talk to, you know, a principal or a partner. And then that meeting happens and they're like, it's interesting. I don't have like super high conviction, but like we'll bring it up at a partner meeting on Monday. And then, you know, the GP or whatever is like, yeah, let's do a meeting with them.

• 18:10Speaker 00

  By the time that it gets to that point, it's like, okay, maybe we don't have conviction to write a big lead check. But like, maybe we put something in because like it made it all the way through the process. So like, you know, this is probably worth a participation check. Our approach to this is like, it's going to be really hard to get anything through because there's no structure set up to get it through. It's just like personal willpower to go and convince people and get them to take the meetings out, outside of this process cycle. And in order to get anything through, you literally have to just be pounding the table. It is on you to have the level of conviction that's required to get people on board.

• 18:45Harry Stebbings?

  How do you feel about asymmetric information there? So in this circumstance, say me and you are partners and you say, Harry, Flysport, Ryan's fucking amazing. All of these reasons why we should do the deal. Yeah, Trey, I get it. I don't know shit about Flysport. I don't know shit about the business. There isn't an alignment of knowledge on a deal. And so you miss benefits of partnerships, no? How do you think about that?

• 19:07Speaker 00

  Yeah, I mean, naturally, we're going to pull in the person that we feel like knows the most about the industry in the process to have those conversations. You know, I'm not going to invest in like a rocket launch company without talking to Delian and Scott. We're always going to pull in the other people that are necessary to get to the best decision possible. It's just not done in a process oriented way. We really just want to back people in their conviction. So when I wanted to make the Flexport investment, I had to kind of go through the gauntlet and answer a bunch of questions from the team and pound the table. But at the end of the day, they were like, we made a bet on Trey. Trey has high conviction in this. And if he wants to put his, you know, his reputation and his career on the line to go and write a big check into this company, we need to support him to do that.

• 19:50Speaker 00

  That's like, kind of on you to figure out whether or not you have that level of conviction.

• 19:54Harry Stebbings?

  How do you think about winning deals? Say you have a really competitive deal, say Flexport suddenly gets 10 term sheets and some of the best firms in the world alongside you are competing for it. Do you come together as a partnership to win it then? Do you still do the isolated partner strategy? How do you think about whether or not to come together to win?

• 20:11Speaker 00

  Honestly, the answer is yes, of course, we'll like work together as a partnership to win deals. Our platform is very strong. And so I wouldn't say that we're often in situations where people are not keen to take our term sheet over someone else's, which is a great advantage and it's a great advantage of having a longstanding brand and very opinionated partnership that is very publicly opinionated.

• 20:32Harry Stebbings?

  Trey, have you ever lost a deal?

• 20:35Speaker 00

  Yeah, I mean, there, there's at least one that I can think of that I lost on a massive price disparity. Not on a like fund decision making.

• 20:44Harry Stebbings?

  Did that deal end up being a mistake for you to not pay up that price?

• 20:48Speaker 00

  No, it didn't, actually. I think like we were wise to hold the line on that, on the price in that specific case. That might not always be the case. There might be examples where it would have been better to pay the price, but I don't think that's generally true. And this is going back to that earlier point I was making about heuristics is that you can't constantly convince yourself that every exception is actually an exception. Usually it's just wrong. Usually you should just follow your instincts around the heuristic.

• 21:15Harry Stebbings?

  How do you think about your own relationship to price? I find that often we can lean on price as a crutch. How do you think about when you're willing to pay up versus when you're not?

• 21:24Speaker 00

  There's something deeply troubling about prices getting out of control that have nothing to do with the price itself. So usually what an inflated price means is that the deal is being competed. And so the founder believes that they have leverage. The worst deals are the most competitive deals because they're the ones that are super consensus. Everyone agrees on the thesis. Everyone agrees on the founding team. There's no edge on the investment. Everything is going to be expensive at every round. So your expected value is going to decrease. And it usually indicates that there's some memetic contagion that's happening in the marketplace. And this, for example, is why

• 22:05Speaker 00

  Founders Fund, why Peter put us in San Francisco when everyone else was on Sand Hill, because he wanted us to avoid getting caught up in this like, are they going and meeting all the way down the street with all the other people? It's because memetic contagion leads to bad investment decisions. When a founder says, I'm going to let this run like auction style, they're actually saying like secretly inside their head, subconsciously or consciously, I'm like an athlete model. All I care about is competition and I'm just going to let it run and I'm going to take the best price at the lowest dilution that I can accomplish. I don't care if that impacts the long-term responsible growth of my business.

• 22:44Harry Stebbings?

  Dude, I so love doing this show because I learn from it still after nine years. But I have so many founders that say to us and to every investor, especially in Europe, hey, super appreciate the interest, even a term sheet. I do want to run a fair process and I'm actually going to make a decision next Friday when we've run the process. That's how we're doing it. How would you respond to that? And do you engage in situations where there's a process?

• 23:09Speaker 00

  I actually think that's super responsible. I think communicating expectations and aligning people is really important. The thing that I actually like a lot less is the false sense of scarcity and urgency. And that was like what was happening in 2021 where the founder was saying like, you have 24 hours. I have an exploding term sheet. I'm going to pull the trigger on this. That is basically saying, I'm using the leverage that I have perceived or re To push people to do things with limited information. And those sorts of behaviors are like, they're manipulative and they usually lead to bad outcomes. And so I think someone saying, I'm going to give this a week. This is when I'm like hoping to move through the wickets.

• 23:50Speaker 00

  And if they really want Founders Fund involved, like they're going to be respectful to us kind of walking through those wickets alongside them.

• 23:57Harry Stebbings?

  Can I ask you, we mentioned some of the crazy times last years before. What would you say are your biggest takeaways from the crazy times? And did you change your style in any way because of them?

• 24:06Speaker 00

  You mean like the ZIRP phenomenon of 2020, 2021? Yes, I think that the primary lesson for me is that I really don't have fun in that environment. It was super stressful and I think for some people it was like, the deal velocity was super energizing. For me, it was awful and draining. I was on the verge of just leaving venture capital because this idea that, you know, a founder goes out and basically holds their capital source hostage by creating this like, this hyper competitive, overpriced environment was just gross. Like, it just didn't feel right. And I say that as a founder as well, like we ran a process at Andro during that time and we didn't do that because we agreed, this is really gross. We're not just going to let the highest bidder come in and sweep us off our feet.

• 24:51Speaker 00

  We have to think about the future of our business. And I think now in 2024, looking back on what happened, it's very easy in retrospect to say, wow, we really let that get out of hand. And now we have got, we have to do a recap, we have to do a down round, we have to do all this crazy structure. But we're doing the same stupid stuff all over again. And I don't, it's like, people don't realize, like, guys, you have to calm down. Think about the future of your business. Don't think about what makes you feel good when people are, you know, patting you on the back and giving you exploding term sheets and taking you out to steak dinners. This is not good for your company. It might be good for your ego, but it's not good for the company. And that's what we should be maximizing is the long-term value and sustainability of these businesses.

• 25:34Harry Stebbings?

  This was my point with some of the crazy, crazy rounds that we're seeing now, especially in AI. Do you think we actually did learn our lesson?

• 25:42Speaker 00

  I don't think we did. I think there are, there are some people in the industry that I have a tremendous amount of respect for that have looked at this and said, we're just not going to play this game. Like it was, guys, it was literally like two years ago. This isn't like a 10-year information gap. It was like two years ago. And then there are other people that are saying like, YOLO, like I have to win, I have to get in, I'm going to plow it in. You know, there was this, this incredible scene in Silicon Valley that I've been sending some people this video. The main character is sitting at the bar with another founder and the guy is like, you know, his company was taken away, taken away from him. He's no longer the CEO. And he says, you know, you could have just like taken less at a lower price. And he was like, no, no, like I was offered this price and this amount. And he was like,

• 26:26Speaker 00

  yeah, but you didn't have to take it. You could have taken less at a lower price. And he's like, why didn't anyone tell me I could have taken less at a lower price? And I feel like sometimes founders are just, they just get caught up in the moment. They get caught up in this idea that like, the only thing that matters is up and to the right minimizing dilution. And we'll see what happens. We'll see if, if like that lesson persists.

• 26:50Harry Stebbings?

  I get in trouble for this when I see this, but I feel this when I see like two on 20 YC rounds. And I'm like, with two on 20, you're automatically excluding any top venture firm, because really the 1.6 is going to be available for a lead, which is what, 7.8%? You're not going to do something for 7.8%. It's not worth your time.

• 27:09Speaker 00

  Right.

• 27:09Harry Stebbings?

  Instantly it excludes them. So I have to ask, a bit of a weird one. Doug Leoni said on the show that venture capital has moved from a high margin boutique business to a low margin commoditized industry. Do you agree with him? And will we see venture returns degrade as a result?

• 27:25Speaker 00

  I definitely think there's truth to that, that statement. I think, you know, the industry has certainly become significantly more competitive and commoditized. At the same time, the returns end up being pretty highly concentrated towards the winners. You don't see like really high IRRs across every new fund that pops up. There's definitely still a great potential for the asset class as an asset class, but certainly like, as you know, Peter points out in his book, Zero to One, competition is for losers and it will always be for losers. I don't care if it's venture capital or startups or any, it's competition is for losers. And so we need to figure out ways to differentiate and stand out.

• 28:03Harry Stebbings?

  What do you think is your biggest challenge today as founders fund? I remember when I had Keith on the show, Keith said about just finding the next generation of great talent and it being a young person's game, which I thought was an interesting answer. What do you think is your greatest challenge as founders fund today?

• 28:20Speaker 00

  Deal flow is always the biggest thing for venture capital. It's like you have to have access to the deals that are going to move the needle. And for large funds, the economics only really work if you have a 10 plus billion dollar winner in every fund or more than one in most cases. You have to evaluate yourself on whether or not you got hits on those monopoly style winners. That's just about maintaining access to the network and being super easy to work with. And I think founders fund has the ladder in spades. Like, you know, we, we were the first fund that was talking about being founder friendly. You know, we don't generally want to take board seats. We are incredibly hands off and operationally helpful when asked, but only reactively.

• 29:04Speaker 00

  And the former is the harder part, though. It's like you have to make sure that you are seeing all of these companies. That has to be the focus for the entire investment team.

• 29:12Harry Stebbings?

  Do you think the best founders need their VCs?

• 29:16Speaker 00

  You can definitely get good advice from people throughout the industry, whether it's other founders or VCs. And a great founder will seek wisdom from people they trust that have experience that's relevant to what they're doing. Do I think that doing that in the structure of like, gather a bunch of investors on your board is the way to do it? No, I think that's really stupid. Any company that's successful is not successful because their VCs are really smart. That's not how this industry works. The VC is not going to do the, the hard work that's involved with building a company. The best companies are going to be the best companies because the founder and the team that they've built around them is awesome and has a plan and a vision for the future.

• 29:57Speaker 00

  The best the VC can do is ride along and not be annoying and not create drag for the company. Maybe on occasion, they can provide some advice or introductions that are helpful, but that will not be the reason the company works.

• 30:10Harry Stebbings?

  You know, venture is today kind of put in two worlds. You've got like the boutiques who have specialisms and you've got the kind of capital accumulators. Andreessen and Sequoia and COTU and NEA. Where is founders fund? Because you guys like reduced your fund size. The fund sizes themselves, I don't believe are actually that big. I mean, I think it's about a billion dollars each, which is big, but it's by no means the large, large funds that we see at other funds. Where do you sit in capital accumulator or boutique?

• 30:40Speaker 00

  It's a good question. I think probably somewhere in the middle. We have a lot of money under management, but we also are very intentional about playing our core venture strategy. And so we're not trying to be cute with weird structures and debt instruments and big category specific funds, nothing like that. Our core vision is we just want to invest in the best founders, building the best companies that are going to be category defining. And I think you can do that through a very traditional venture model of can we get a check into the series A and can we follow on to the ones that are working? And that's what we do. And I think that's what we're always going to do.

• 31:17Harry Stebbings?

  So Trey, you mentioned the follow on now. I have to ask this. I think reserves are a delusion. I think it is too difficult in the majority of cases to know which company is truly a value generator and which just has momentum, which is different to true sustainable value generation. What have been your biggest lessons on reserves? And how do you think about that when I hear, when I say that?

• 31:37Speaker 00

  Well, I do think it's important to hold reserves to double down in places where you see fund returning potential. I don't believe that doing that in a way that's like guaranteeing your portfolio company is that you have like reserve checks that are going to back into them. I don't think that model makes sense because, and this is by the way, the biggest risk of taking seed money from an institutional fund is that like doing your pirata is super lazy. Doing more than your pirata is actually a signal. And if you're not going to have real signal, if you don't have high conviction, you probably shouldn't be doing anything at all because the pirata again is just super lazy. The strategy really should be make your bets and then where the conviction is justified, you should be doubling, tripling, quadrupling down. And so you do need to have fund access to do that so that you're not striping across

• 32:22Speaker 00

  a bunch of different funds. But I don't think doing that in a really like structural procedural way is smart either.

• 32:29Harry Stebbings?

  Do you think about downside protection when investing? You guys also invest large checks. Do you think about downside protection, given the size of chess you write? Or is it all upside maximization, in the words of Brian?

• 32:40Speaker 00

  All upside maximization. No, downside protection is silly. Like, I think if you go back and you look at our portfolio, like, whether or not we got our money back has never impacted fund performance. Like, the only thing that moves the needle for a venture fund of our size is 10-plus-billion-dollar category-defining winners. That's it. Everything else is just a rounding error to zero.

• 33:01Harry Stebbings?

  What's been your biggest loss? And what did you learn?

• 33:04Speaker 00

  Well, I've only been in the industry for 10 years. The reality is, is that startups survive for longer than anyone thinks they will. There are certainly investments that I've made that are still, you know, puttering along, haven't figured out a way to hit the inflection, but I wouldn't call them a loss. The biggest thing, the biggest lesson that I've learned from these is that there are times where I've gone in and I've said, this has 10x potential from where it is right now. And therefore, it's probably worth making a bet. I look back on some of those investments that I've made and I've said, even if it 10x from, you know, a small Series A, it's not going to return the fund. It's not going to really move the needle. Really, I should be focusing on finding massive upside because the opportunity cost of deploying these checks is actually quite high.

• 33:48Harry Stebbings?

  But do you not think you will always underestimate the size of your true winners? You know, if you look at all of Bessemer's mimos, Shopify, I think they put it at a $2-billion company. Snap was thought to be a $500-million company. Procore, a $300-million company. These are across different firms. I'm not just chastising Bessemer. But you always underestimate the size of your winners. You know, Peter and Facebook as a core example. No one would have expected Facebook to be what it is.

• 34:16Speaker 00

  I think the example that you just offered is exactly what differentiates Founders Fund. Pushing your team to do things like deal memos, for example, forces them to, like, put down a number that they're later going to be judged by. So the investment team is going to go back and they're going to look at that investment memo and they're going to say, Wow, you outperformed expectation on this deal. Isn't that great? If you don't hit it, you know, you're going to, you're going to be held accountable for missing. And so of course, everyone is going to underestimate because they want to lower the bar. That's required for them getting credit for some big outcome. At Founder Sun, we won't do the investment if we don't believe it can return the fund. And so we absolutely have to have crazy amounts of conviction to make these bets. And I think that is like core to our culture.

• 34:59Speaker 00

  If you look at any of the big outcomes across our portfolio, whether it's Spotify, Stripe, Airbnb, Palantir, SpaceX, Anduril, Stemcentric. So if you look at all of these big outcomes for us, every single one of them, there was someone on the team banging the table, saying, this is a hundred billion dollar company.

• 35:16Harry Stebbings?

  When you have to have this level of upside, do you not put market first above founder? Because if a founder is in e-commerce, honestly, the chances of it being a hundred billion dollar company, it's just so fricking hard. So my question is, do you prioritize markets over founders, given the importance of upside maximization and true upside only being available in very, very few markets?

• 35:40Speaker 00

  No, because I think the, the best founders are going to pick really strong markets and they will increase the probability of success, even in like a middling market. I, I think the founder has to be the atomic element, always. But obviously, like, there are going to be great founders that do kind of middling things. I wrote an essay called Choosing Good Quests that you can read online with Marky Wagner, who's actually one of our portfolio founders as well. And I think this is like endemic, actually, in Silicon Valley, where you have all these really talented people that have the potential to go and do something that's like world changing. And instead, they do something that's easy, that they know they're going to make money from. It's like George Clooney sells tequila on the back of his brand. Good for George Clooney, it's a commodity, there's nothing special about his tequila.

• 36:25Speaker 00

  It's the same thing with enterprise SaaS. If you're like a multi-time successful entrepreneur and you're starting like a fairly simple, trivial enterprise SaaS company, like shame on you, shame on you. You need to go big, like have some vision for how you can impact humanity.

• 36:40Harry Stebbings?

  Don't just ruin my investment thesis, okay? Why like boring enterprise SaaS companies? You come with your fucking defense and space companies. And you tell me that B2B payroll is bad? Damn.

• 36:54Speaker 00

  There are some great enterprise SaaS companies. I think there's some great founding stories behind enterprise SaaS companies as well. I just think that as, as a category, there are a lot of them that are pretty uninspired.

• 37:04Harry Stebbings?

  Will you back a founder when you hate their idea? You love them, but you hate their idea.

• 37:10Speaker 00

  There are plenty of situations in which I've done exactly that, or I've at least been tempted to do that. Again, the founder is the atomic element. A really great founder and team are going to be able to pivot their way into strong product market fit. Whereas a great idea with a weaker founding team are going to get stuck and will likely spin out. So you have to start with that founder aspect first.

• 37:32Harry Stebbings?

  Can you tell me about a time when you thought a founder was great? They turned out not to be, but like, what did you not see that you wish you'd seen? I backed this incredible data scientist out of this amazing company and everything technically was great, but they were an operator, not a founder. And the speed was slow, the creativity was low, and they were an amazing operator, but actually they were not a founder and I misjudged and I overestimated their founding ability because their technical ability was so strong. Big mistake.

• 38:04Speaker 00

  Yeah, like I would say the most common example is where you have a founder that doesn't build like a diverse enough set of skills around them with the rest of their founding team or their executive team. And they assume that their, you know, specific superpower will be enough to make it work. Because there are a lot of brilliant people. Some of them are like scientists, some of them are software engineers, some of them are business people. You know, you could have like a, a sales founder that it could be revolutionary and could change an industry, but they need to have a complete team. And so I think sometimes I've gotten really excited about a, a single person. And then it turns out that there isn't a completeness of team. Maybe that person does not have a particular strength in recruiting and that becomes super problematic for the business.

• 38:47Speaker 00

  So I think like, you want to see the depth in bench with even the best founders.

• 38:51Harry Stebbings?

  But how quickly do you know if a company is good or not? I think you know in the first month.

• 38:57Speaker 00

  Wow, that's really fast. I don't know if I would say the first month, but definitely in the first six months, I think you can get a sense for momentum. There's almost nothing as important as momentum in startups. There's this, I think, idea, especially in deep tech, that like, if you just hold out long enough, like eventually they'll cross enough tech milestones that like, things will seem like they're, you know, starting to move. And even in deep tech, momentum turns out to be the most important thing. And you can see that, you can feel it, it's visceral. And I think that it's definitely not five to 10 years, like people often talk about as, as venture capital windows. And if you go back and you look at the best companies in any portfolio, they were kind of the best companies at every stage. Incredibly awesome at A, they were incredibly awesome at B,

• 39:41Speaker 00

  they were incredibly awesome at C. Very rarely do you see a company that like, struggled for a long time and then like, suddenly hit an unlock. That doesn't really happen that often.

• 39:49Harry Stebbings?

  Well, I could push back on that one. Like, Figma for sure was not hot in the early rounds, took a long fricking time for anything to come out. Your Hubspots of the world were not really very hot, took a long time for much to come out. Viva on the vertical SaaS space, definitely not hot, but unbelievable $35 billion business. I'm almost like, there's always a trough of disillusionment that a company goes through, even in the funding markets, where it's like, this is the rough round.

• 40:17Speaker 00

  I think those examples are less common than the ones where the momentum drove them all the way through. I don't disagree with those specific examples. I just think you're cherry picking very specific examples that are the exception, not the rule.

• 40:29Harry Stebbings?

  Listen, I'm smart with my usage of data, okay? So just give me some credit. My question to you is, you mentioned there about kind of timing of deep tech startups in particular. I'm always just like very focused on market timing. I never delight to say market timing risk. You clearly do, which I love. I mean, that's some real kahunas. How do you think about market timing risk as an investor today and as a founder? Both?

• 40:52Speaker 00

  I think that- It's not on me as a venture capitalist to evaluate markets and then pick companies to time some arbitrary thesis I have for any particular market. That's like asking too much. VCs are not super talented specialists in any one space. Like the best VCs are kind of generalists. And that means that they might have like a shallow understanding of a wide set of things, but they probably don't have like some massive polymath depth of understanding of every type of company they're going to look at. And so I think it's really on the founders to communicate why the market timing thing is relevant to their business. And the best founders are able to do that in a way that's super compelling. And so again, I think this comes down to like, do you have conviction?

• 41:35Harry Stebbings?

  Oh, thank God. I don't have to do it then. Chris Dixon actually said on the show yesterday to me, I like to predict the future and then kind of find companies that align to that prediction. Would you very much disagree with that in terms of a style? It's not disagree, but you have a very different style, I take it.

• 41:52Speaker 00

  Yeah. As a founder, I think, yeah, Androl in my, in some way was me predicting where I thought the defense market was going to go. And so as a founder, I think that is what their job is. As a VC, I think like your investment thesis is only as good as the strength of the companies that come and pitch to you. And so did I have like some super crazy interest in supply chain and logistics or a thesis in supply chain logistics before I invested in Flexport? No, of course not. Like I needed Ryan to like convince me of the timing to the market. And so I think that like anytime you're, you're looking at a thesis about the future, you are saying there is a category and I have like some belief in that category. And that means you're probably too late. Like if you're, if you're

• 42:35Speaker 00

  like, I have a thesis on space tech, space tech, but you're not a space tech investor, you're probably losing money. If you're like, I have a thesis in crypto, but you're not in Bitcoin and Coinbase, you're probably losing money. If you have a thesis in cyber, but you're not in Palo Alto Networks or CrowdStrike, you're probably losing money. It turns out that the core monopoly investment that won is the only one that mattered. And the rest of the category matters a lot less. So if you have some vision for what the future looks like, and you're looking for a company to invest in that's doing it rather than starting it yourself, you're probably already too late.

• 43:06Harry Stebbings?

  First, despite a decade in this business, clearly you haven't learnt the core lesson, Trey, which is post-making investment that goes well, you absolutely did have the thesis that it would play out in this way. And actually, it was all your prediction. You actually really co-founded the company despite the fact you only put 50K in at the Series D. My grand, that's my favorite when you see those ones. You mentioned there about

• 43:29Speaker 00

  Oh, yeah.

• 43:30Harry Stebbings?

  The core taking so much of the value. And I agree with you. You look at your Androids of the world, you look at your OpenAI's of the world. So is your perspective as an investor and as a founder, then, fuck it, don't try and do defence tech, just do Android. And instead of trying to do AI, just do OpenAI. Is that generally the right strategic play, do you think, for investors?

• 43:53Speaker 00

  I mean, there will be other companies that might be worth taking a bet on, for sure. You know, if you were a social media investor, you missed Facebook, but you got conviction and invested in Snap, you actually did pretty well. There are exceptions. There are places where you should stay open to the idea that there's a brilliant founder and a team that has the ability to go and to make something in a market. But I think that this idea that investing broadly across an entire category, where you're doing relative rather than absolute assessments, is just bad strategy. It doesn't make any sense. Like, there's not going to be 100 SpaceXs. There's probably not going to be two SpaceXs. But if there are, you should just be making that one investment in like, a really high conviction thing that you would have done regardless of whether or not you were looking

• 44:36Speaker 00

  at that category. Yes, that might be a violation of the rule of, look at me, I'm so smart. I don't think I'm so smart. I think like, the founders are the ones that are really smart that are changing the world, and I'm just lucky to be on the ride with them.

• 44:48Harry Stebbings?

  As an investor, yes, I agree with you. But as a founder, you're on the flip side of that. And so I do just want to flip to that, because you said you have to paint a compelling case for why now, and why it is more exciting than ever today than it was in prior years. What was your insight development, the way that you saw the world differently to others with Andrew that you really had from day one that made you want to commit so much of your life to it?

• 45:11Speaker 00

  I mean, I had spent my entire career in national security. I worked in the intelligence community after college and then I was at Palantir really early on, supporting intelligence and defense programs. This was a space that I've always been really passionate about. I learned a ton of lessons from that 10 year run prior to joining Founders Fund and started going out and meeting with as many companies as I could find that were bidding on federal contracts and also raising venture dollars. And I was shocked at how little there was going on in leveraging cutting edge technologies, particularly in software, to impact critical national security requirements and gaps in our capabilities. And I kind of looked at that space and said, this is not going to be good if we shift out of counter insurgency and counterterrorism into

• 45:56Speaker 00

  great power conflict. And if we're going to compete in great power conflict, we need to like actually bring a software defined mentality to our national security apparatus.

• 46:06Harry Stebbings?

  I was pause, was great power conflict, just so we're aware, this is like global war instead of just traditional counterterrorism, correct?

• 46:12Speaker 00

  No, it's specifically like, we're no longer competing with like rogue agents and non-state actors. Our competition are huge nation states with a lot of power resting behind them, places like China, Iran, Russia. We had for over a decade, really like a decade and a half, we have just been entirely focused on counter insurgency. The problems that you're dealing with, with things like airspace superiority in Iraq or Afghanistan, totally different than determining airspace superiority in Ukraine, or in, you know, a potential Taiwan conflict. And so we really needed to like shift to a mentality of how do we compete with great powers? And how has that changed since the last time we did this during the Cold War? And the answer is significantly.

• 46:56Speaker 00

  The capabilities, the huge expensive platforms that we built for competing with the Soviet Union are not particularly relevant in a future conflict with, you know, a China or in Iran.

• 47:07Harry Stebbings?

  In terms of like how they're so different, how are they so different? What were we woefully inequipped with?

• 47:12Speaker 00

  Yeah, so like when we were preparing for a fight against the Soviet Union, we were building nuclear submarines, aircraft carriers, advanced fighter jets, with the idea that we're competing with MiG-29s in an airspace. So if you have to build like a counter air system and you're shooting a two and a quarter million dollar missile at a tens of millions of dollar MiG-29, fine. That's a trade off you're willing to make. But in modern conflict, we're talking about swarms of drones, kamikaze drones, low cost remote controlled systems. You're talking about autonomy. And so can we afford to shoot a $2 million Patriot missile at a $150,000 cruise missile or kamikaze drone? No, it doesn't make sense anymore. Now the whole thing is just messed up. And so when you're not fighting MiG-29s,

• 47:56Speaker 00

  you have to make decisions about how you're going to do airspace superiority. And this translates to every domain. It's like we have to make the same decisions with undersea, with surface vessels, with ground vehicles, with airspace, with space.

• 48:08Harry Stebbings?

  Okay, I get you totally. What worries me is two things. One is customer education. When you're selling to governments in a lot of cases, the level bluntly of intelligence around the latest use of AI or the latest use of LLMs or the latest use of any of the things that we talk about quite brazenly in tech is so low. How do you approach your customer education when it's a really challenging start?

• 48:33Speaker 00

  I think this is core to doing work in this particular sector. And it's not the field of dreams. You know, like if I build a really cool product or capability, it's not like the government is just going to show up and be like, yeah, I'm a buyer of whatever it is that you're building that you think is solving a problem. You have to have a holistic view of government relations, lobbying, being really good at telling a narrative, communicating to agency heads, decision makers, and your potential users in the field. This is like the type of company that's really, really hard to build for a handful of teenagers in a garage. It's not like a software company that has like the same type of breakout story as Facebook. And I don't think it's like random chance that Palantir, SpaceX, and Android were all founded by billionaires. It turns out that it's that hard to do this.

• 49:18Speaker 00

  And so you have to approach it with that in mind.

• 49:21Harry Stebbings?

  What is it, the billionaire element that makes them successful? Or is it the structure of their teams and the knowledge and the skill sets of their teams? Because brilliant people can raise billions of dollars. It's not the billions, it's the team composition of Palmer, of you that make it special, no?

• 49:36Speaker 00

  There is a capital advantage to having a billionaire as a co-founder. At Palantir and SpaceX, certainly, it took a really, really long time to get momentum on the business side of things. And so you needed to be able to raise money through a drought while you were figuring that out. At Anduril, it's a little different now because we have the benefit of standing on the shoulders of giants. We have done this before. We saw the way it worked with them. There are hundreds of people who have executed this sales motion successfully. It's not quite as hard, but there's still a huge capital advantage to going in and saying, this is capital intensive. It's going to be really hard. We want to raise a war chest to finance getting through to program of record wins. And this isn't something that's going to take six months. It's something that's probably going to take closer to three years.

• 50:19Speaker 00

  It is important to have the ability to go out and raise that sort of capital.

• 50:22Harry Stebbings?

  Another concern that I always have is just like the incentives of buyers. If you think about a lot of the incentives of these kind of bluntly averagely paid, middle management, government bureaucrats in a lot of international governments. Why would I bother buying Anduril? Now it's obviously a very well-known brand, but in the early days, when I've got established brands where I'm not going to get, it's the same old LP argument in venture. Just invest in X well-known firm. How do you fix the incentive problem of buying from innovators?

• 50:51Speaker 00

  Yeah, I mean, as I mentioned before, with a different set of problems, I think this is primarily a culture problem. All of the authorities that need to exist to buy products from non-traditional companies, they all exist. You can do it. If the government wanted to do it, it could do it. The problem is, is that they don't. They don't feel as comfortable with it. They claim that it's a much riskier path. I happen to disagree with that particular fact. But I think, I think the reason why in the early stages, people were willing to take a chance on us is that we were working very focused on problems that were clearly software problems. And I think they had had like long-running bad experiences with the traditional players in the space, coming to them delivering. Delivering capabilities that relied on the technology delivering the against the problem

• 51:35Speaker 00

  set depended on software execution. And so when we come in and we have a demo and we say, we can actually do the thing that we know you're trying to do, and we can demonstrate that to you in real time. And we've taken the risk of funding the development of those capabilities. We're not asking you to like, believe us in like a response to an RFP. We're just going to show you that we can do it. And that shifting that risk to us rather than putting it on the government was really important to those early ones.

• 52:01Harry Stebbings?

  What year was Andrew founded? 2017, 2018?

• 52:05Speaker 00

  Seventeen, yep.

• 52:06Harry Stebbings?

  So did you just have a crystal ball and predict the explosion of global conflict? Because we could have continued, we could have continued in this period of détente for another 10 years. And the need for Andrew would have been lesser than it is now, for sure. Was it just lucky on timing, dude? That sounds awful, not lucky on timing.

• 52:25Speaker 00

  No, no, yeah. Like I said, I'm not, I'm, I'm gonna do the opposite of what Chris Dixon did. And I'm gonna say, I don't have a crystal ball. I'm not predicting the future. I think all of us in the, on the founding team of Andrew, like, we perceived that we were going to care a lot more about these things post, post insurgence, counter insurgency, counterterrorism. But obviously, like, I would not have guessed that all these global conflicts would have necessarily happened. But I think the writing has been on the wall for a while, that globalization didn't really work, and that traditional strategic deterrence with nuclear weapons was not going to be the, the only thing that drove reduction in conflict globally. And so I think there was, there were some smart decisions that were made. And I think we had

• 53:08Speaker 00

  a lot of conversations about those, those elements. But I certainly wasn't like, standing at a whiteboard, you know, with lines and pieces of yarn and pieces of paper being like, and you see, China is going to invade. I, I, I don't think I had that level of insight.

• 53:23Harry Stebbings?

  We got Putin coming down the left. That's 2023.

• 53:26Speaker 00

  Yeah, exactly. To be fair, shortly before Andrew was founded, Putin went to a university, a technical university in Moscow, and he said, he who controls artificial intelligence will control the world. And so we weren't the only people that were thinking about this. He had clearly been telegraphing his intention with tech development in Russia since even before Andrew was started.

• 53:48Harry Stebbings?

  Just gonna lob this one in. Were you not quite impressed with him in Tucker Carlson's interview?

• 53:52Speaker 00

  I mean, the level of historical depth was was really special. My concern was was less about like, is Putin impressive? Is he unhinged? It was more so that like, man, we have really just allowed our Western political system to just be destroyed by mediocrity. Our standards for our elected leaders are like bargain basement level. It's really pathetic. I don't know what it's going to take to convince talented people to put themselves in a position where they're running for political office, but I think this is a great risk to human civilization at this point. We need to do a better job.

• 54:27Harry Stebbings?

  I'm not being rude. Why don't you? So like, it's fine. No, but it's fine for us VCs and and startup founders as well to say like, God, what a woeful state of politicians. Well, I mean, we're pretty smart people, but we choose to be in the private sector. A lot of the time because it's more lucrative, because we see a better life. But if we really thought that it could be improved and you know that you could do a better job, should you not take that on?

• 54:52Speaker 00

  I mean, I I am deeply committed to the idea that I will return to civil service at some point in my career. I don't know what, from a timing perspective, that will look like, but I'm deeply committed to that. As far as elected office goes, my wife, who I love very much, has told me that she will divorce me if I ever run for office. And so elected office is off the table.

• 55:11Harry Stebbings?

  So you said, God, it was that easy? Okay, sold.

• 55:17Speaker 00

  Yeah, she really doesn't like the idea of being married to a politician, which I get. I'm okay with that.

• 55:22Harry Stebbings?

  What was the most non-obvious reason for the success of Anduril? Amazing team, complementary skills, yes. Timing, yes. What's like the, no one thought of that, but it was really core to the success?

• 55:34Speaker 00

  I think you kind of hinted at this around like having a holistic view on skills. But I really want to beat the drum and say, you have to be good at selling to the government to make companies in this sector work. You either have enough money to survive being bad at it for a long time, or you know what you're doing from the beginning. And I think there are way too many companies in this hype moment that are approaching this and saying like, I'm just going to build something really cool that warfighters love and expect that that's going to be sufficient and it's not. And that's what we knew from the beginning at Andro and that's probably the most prescient thing we did is to say, we're going to hire a lobbyist, literally in the first week of the company's existence. And we're going to build the relationships that we know are going to be important for authorization and appropriation of funds to the programs that we're working on.

• 56:18Speaker 00

  And most startups, just they don't have the background to understand that. They don't have the capital to do it, even if they did understand. That's a big differentiator.

• 56:27Harry Stebbings?

  We've seen like hard tech become successful or popular again in venture. Everyone wants hard tech again. And I think we're just going to see a generation of venture investors burn a load of cash again on hard tech. I think it's such a different skill set investing in it compared to traditional enterprise software fintech consumer. And I don't think they fully understand or comprehend the differences. Do you agree with me?

• 56:50Speaker 00

  One of the most important things that I've learned about hard tech in the 10 years I've been at Founders Fund is that you have to have someone on the founding team who's as good at business as the technical founder is at the tech. There's just no way around it. The most successful hard tech companies always are paired with brilliant business people. You can't, you can't just evaluate one side. You have to evaluate both.

• 57:10Harry Stebbings?

  So Palmer is the technical genius at Andro. How do you characterize the teammates?

• 57:16Speaker 00

  Well, we should keep in mind that the co-founder CEO is Brian Schimpf, who is the most brilliant software engineer I've ever worked with. And he ran engineering at Palantir, actually before he came over to be the CEO at Andro. So Brian's kind of like the software tech genius of the company. Palmer is kind of the prodigy polymath hardware genius. They both work very closely together on product, like making sure that the thing we're delivering to the customer solves the problem and solves it in a way that is efficient and reliable. And then Matt Grimm, who's the other co-founder, he is the COO. He like runs the day-to-day operation. He's like a machine, making sure that all the trains are running on time, which is hugely important.

• 57:56Harry Stebbings?

  You mentioned delivering to end customers there. Do you sell to everyone? There comes a point where one has to have some morals. How do you decide who you sell to?

• 58:04Speaker 00

  Yeah, this is, this is probably like, not to put a, you know, Target on your back, Harry, but this is the most naive question that non-defense people ask. Because the reality is that we don't. We don't decide. The US government decides. There aren't very many people that we can sell direct to, like the UK, Australia. Like, there's just not that many people that are buying direct.

• 58:26Harry Stebbings?

  You can't sell direct to the UK?

• 58:28Speaker 00

  No, that's what I'm saying. There are very few that can buy direct because they have adequate budget and they have the existing relationship with the United States that allows for these sorts of arms transfers.

• 58:39Harry Stebbings?

  Can any national government not buy from you? I'm really sorry for being naive.

• 58:44Speaker 00

  Definitely not. No, we're selling, we're selling munitions. We're selling government-controlled, ITAR-restricted technology that the US government has to facilitate the transfer of. And so it's the US State Department that's deciding who they're going to send the tech to. Not like random governments making decisions on money that they're spending.

• 59:05Harry Stebbings?

  You can't just choose the Democratic Republic of Congo just for a law.

• 59:10Speaker 00

  We can't just randomly sell to governments that show up with bags of cash. That all is facilitated by the US DOD, the US Department of State. Obviously, like, we have to have conversations as an executive team about like, which use cases we're passionate about working on and stuff like that. But we are like massively controlled by the US government when it comes to like where we're allowed to send our stuff.

• 59:32Harry Stebbings?

  But the US government has made a ton of very, very serious, severe mistakes around the types of allies they support over the years. The Mujahideen, in many respects, being one very obvious and clear one. Saying, oh, we kind of follow them. Well, they're clearly not a great picker.

• 59:49Speaker 00

  Uh, yeah, I mean, there's obviously like questions that that you should ask. But at the same time, like if the US government comes to us, let's say that we were making Stinger missiles during the the early Afghan conflict with the Mujahideen against the Soviet Union. If the US government comes to us as the producer of Stinger missiles and says, "We are supporting the Mujahideen in their fight with the Soviet Union. We want to transfer 1,000 Stingers to them in the next six months and we want you to produce it." Is it on us to decide, "No, we don't want to do that because we have some thesis about what's going to happen in this conflict in 20 years?" Or is it our responsibility in a democratically elected governmental system to say, "We are supporting the Department of Defense's decisions about what they're doing with the equipment that they're buying.

• 1:00:32Speaker 00

  And if we don't like it, we can choose to vote against our representatives. We can advocate inside Congress for people to make different decisions. But like, if they have stuff in inventory, they have the right to send it abroad anyway. Whether or not they're buying it for us for that purpose, or it's just been sitting in a warehouse.

• 1:00:48Harry Stebbings?

  But I do want to ask, I listen to you talk now and I'm like, wait a minute. You run deals, you're a GP at Founders Fund, you're running by parts of Anduril. Also, there's Seoul, which, sorry Trey, respectfully, I didn't even know you did Seoul as well. How the fuck do you spend your time?

• 1:01:04Speaker 00

  It's, it's tough, without a doubt. I set boundaries. I mean, I have, as I said, a lovely wife and two awesome kids. They're 10 and 8. I make sure that I make them breakfast driving to school every morning and I'm with them for dinner every night that I'm not traveling. It's really important to me to like, be present for my family as well. I have an awesome support team around me. I think that's like the only way that this is possible. I have an EA who's been with me the whole time I've been at Founders Fund that is truly world-class. My Chief of Staff, Ellie Wintor Meyer, is, she's been with me for the last nine months now. And she's, makes sure that I know what I'm doing and staying on task and keeping my priorities in line. At Anduril, we have an incredibly talented executive team. And I manage a portion of the business, not the entire business.

• 1:01:48Speaker 00

  And we have a high trust relationship across the entire exec team.

• 1:01:51Harry Stebbings?

  Do you segment days and times for different companies? Is it much more flexible? Do you choose what you're working on per day? Is it very reactive?

• 1:02:00Speaker 00

  It's not that structured. It's, it's much more reactive and flexible. In any given day, you know, like today I had a pitch meeting and then this conversation. And then I have two Anduril meetings and then I have another pitch meeting. So I'll, I'll kind of like bounce back and forth between them. I think the important thing is like, having that support team that's identifying the priorities and making sure that I'm like staying on track of making decisions where I need to make decisions that are high priority at any given moment.

• 1:02:25Harry Stebbings?

  Are you a better investor now that you're founding companies as well?

• 1:02:29Speaker 00

  100%. The entropy on knowledge of operationally being engaged with a startup is so fast. All the things that I did at Palantir for six years, like I feel like were relevant for like my first three years at Founder's Fund. And then like the software that we were using to do things is different. Cutting edge on the technology side is different. You're just constantly going through these shifts. And so I think being in a place where I'm operationally engaged at Andro, I'm up to date. Like I know what people are using. I know what is impacting our business in a meaningful way. I know what stuff that we're, we started using that ended up kind of being not that useful that we turned off of. I'm keeping up on a day to day basis. And I think that that's, that's a super valuable asset to my other job as a partner at Founder's Fund.

• 1:03:13Harry Stebbings?

  We see the Collisons, we see Sam Altman, we see many great examples of big founders investing big, big dollars. Is the future of venture actually founders investing?

• 1:03:22Speaker 00

  I think it would be better and more interesting if it were, because I think that most of the advice that I have gotten the most out of is from existing founders or former founders or operators. They're the ones that have lived in those shoes. They're the ones that have wisdom that I can glean. And I think that if venture is about anything other than just access to capital, the people that have been operators are, are going to be much more useful.

• 1:03:46Harry Stebbings?

  Trey, I could talk to you all day. I want to do a quick fire round with you. So I say a short statement. Okay, hit me. You have many different hats, being a father is one of them. You can call yourself up the night before you became a father and give yourself one piece of advice. What would you tell yourself?

• 1:04:01Speaker 00

  I think I would say this is going to be the hardest 18 month stretch, stretch of your life. And it is worth it in every way. Just keep your head down and realize that there's light at the end of the tunnel.

• 1:04:14Harry Stebbings?

  What have you changed your mind on most in the last 12 months?

• 1:04:17Speaker 00

  Most of the answers that I could give to that would definitely get me canceled. So I'm not gonna, I'm not gonna say those things, but I think there are limits to human scalability. I went through a long period of my career where I was opportunistically saying yes to a lot of things that benefited me tremendously, that I feel really good about, that I just don't have the ability to say yes to anymore. And so I think learning how to scale and then using no's strategically has been a big change for me in the last year.

• 1:04:43Harry Stebbings?

  Biggest lesson from working with Peter for 10 years investing?

• 1:04:46Speaker 00

  Oh, man, he's such a unique person. Most smart people have the ability to collate information. Like, we collect information from a lot of places and then we organize it and ship it. He's source material. He's not collating information. He's just generating. I could talk for days about all the things that I've learned from him. The most critical to this particular moment and what we went through in 2020, 2021, is that hype is not aligned with outcomes. In fact, it's often negatively correlated with outcomes. And so when something feels super consensus, you should be running away, not running toward.

• 1:05:18Harry Stebbings?

  So funny how kind of the most conventional rules of venture are so true, but no one ever listens. It's funny.

• 1:05:25Speaker 00

  Totally.

• 1:05:25Harry Stebbings?

  If you could choose one person as a board member, who would you choose?

• 1:05:28Speaker 00

  No one. Smart people are accessible whether or not you're on their board, they're on your board. You can take advice from people anytime. The last thing you need is unnecessary governance. No one.

• 1:05:38Harry Stebbings?

  Does money make you happy, Trey?

• 1:05:40Speaker 00

  No, money can like simplify things that are complicated or tedious in life. But you'll never find core meaning from the acquisition of wealth. Everyone that has gone through this process, I think, comes out on the other end and says that there's a deep emptiness that they fill, that it doesn't matter how much stuff they pour into it, it'll just never be filled. You have to like, understand the anthropology of your humanity and come to terms with what for me is a religious spiritual faith. But for other people, they might try to find that in all sorts of different things. But money is certainly not one that gives you meaning.

• 1:06:12Harry Stebbings?

  Has your spiritual faith impacted your investing mindset?

• 1:06:15Speaker 00

  Hugely. I think like, a lot of people, and this goes primarily for like, my upbringing even as well. There were a lot of people that they viewed their job as a way to pay their bills, right? It's like, I'm gonna go to work nine to five, I'm gonna make money. And then my life will be what I do when I'm not at work. Because the work is just like a mechanism to generate cash to survive. I think this is like, a deeply un-theological way of viewing the world. We have a responsibility to our vocation. And it doesn't matter what you're doing, whether you're a barista at Starbucks or, you know, starting a defense company. That is your vocation. You are living in service to humanity. And so I think as an investor, as a person of faith, I look at the world and say, I don't want the world to be a science fiction dystopia. Like, I don't want to live in, you know, all these Hollywood pictures.

• 1:07:00Speaker 00

  I want the world to be approaching the kingdom of God. Like, I think we have a role in building that. And so as an investor, when I look at something and I'm like, yeah, this is a vice investment, maybe it's probably going to make a lot of money because it leads to addiction or loneliness or, you know, whatever. I don't want to be involved in that. I don't want to be involved in stuff that might be a good economic outcome, but is going to lead us closer to a science fiction dystopia.

• 1:07:25Harry Stebbings?

  How big could Andro be? Eight billion?

• 1:07:27Speaker 00

  Lockheed Martin does over $65 billion a year in revenue. They have, you know, a two, two and a half X multiple that's applied to them on the public market. It's worth, you know, $130 billion or whatever. Andro operates at higher margins, much faster growth rates. We could be worth over $100 billion with a tiny fraction of Lockheed's revenue. So I'm incredibly bullish on the path that we're heading down and the speed at which we're growing.

• 1:07:51Harry Stebbings?

  You hate memos, but in memos that you always write a kind of postmortem, a reason why, or a pre-mortem, a reason why it won't work. If there was one for Andro, what would it be?

• 1:08:01Speaker 00

  Oh, man. I'll give you two and I'll do it quickly. The first is like, if we build something and we ship it and it doesn't work, we deserve to be crushed by the market. Unfortunately, I don't think that actually happens. The, the big defense companies are constantly delivering things that don't work like they're supposed to, and they're never punished for it. You can see this with like, the way that the 737 MAX has been going for Boeing for a long time. So that's, that's one way that I think it could in theory go south. The other way is that government cultural risk, we are coming to them with a very different business model. And the only way that we win at a scale that we're working towards winning is if we win major, multi-decade long programs, like core military platforms. There will have to be people with courage inside the government to make a decision

• 1:08:46Speaker 00

  to go with a new player, to, you know, build a next generation fighter plane or a next generation counterair missile or whatever.

• 1:08:52Harry Stebbings?

  Final one. Why do you want to be in 10 years? It's 2034. Where is Trey then?

• 1:08:57Speaker 00

  My goal is to stay super opportunistic and not allow my current desires to over determine my future. That said, I will come back to a point that I earlier said, I'm deeply committed to the idea of civil service. And I don't know if it's in five years or 10 years or 15 years, but at some point I want to be back as a public servant, working for the good of our nation and our allies and partners. And there are a lot of ways that I could do that. I'm very open to, to going down that path.

• 1:09:24Harry Stebbings?

  And post 10 years, we can fit another carry cycle in as well. So very strategically timed.

• 1:09:30Speaker 00

  It could happen sooner. It could happen in five years. I don't know. We'll see what happens.

• 1:09:33Harry Stebbings?

  I just saw Arnold Schwarzenegger's "I'll be back" when you said that. So Trey, I love it. Thank you so much for being so great and this has been so much fun. Awesome. Thanks, Harry. I appreciate it, man.

• 1:09:47Harry Stebbings?

  I have to say, I so enjoyed doing that show. If you want to see the full episode in video, you can watch us on YouTube by searching for 20VC on YouTube. Trey was incredible there. I want to thank him so much for being so flexible with that ever-moving schedule. But before we leave you today, one thing I hear from my listeners all the time is that marketing leaders are under more pressure than ever to deliver real business impact. You know, more conversions, lowering customer acquisition costs and bringing in more revenue. But that's impossible when you're stuck with tools that don't move as fast as you do. That's why companies like Dropbox, IDEO and Orange Theory all trust Webflow to power their web experiences. Webflow's visual-first platform empowers your team to own your most valuable

• 1:10:30Harry Stebbings?

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• 1:11:10Harry Stebbings?

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• 1:11:43Harry Stebbings?

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• 1:12:24Harry Stebbings?

  Go to remote.com now to get started and use the promo code 20VC to get 20% off during your first year. Remote: opportunity is wherever you are. As always, I so appreciate all your support. Now stay tuned for an absolute banger of an episode this coming Friday with the one and only Mario Schlosser, who saw Oscar Helsk's stock market price, or market cap, decline by 94%. That show is incredible, coming on Friday.